The US economy came to a virtual standstill in the final three months of 2007 as the deepest slump in the real estate market for a quarter of a century acted as a brake on expansion, according to data released in Washington today.

Official figures showed that gross domestic product increased at an annualised rate of 0.6% between October and December, only half as fast as Wall Street had been expecting.

Today's news meant that the US economy grew by 2.2% in 2007 as a whole - the weakest expansion seen since the 1.6% growth recorded in 2002, when the economy was affected by the dotcom collapse and the aftermath of the September 2001 terrorist attacks.

The weakness of the data was seen by Wall Street as clinching evidence that the Federal Reserve, America's central bank, will cut interest rates by 0.5 percentage points to 3% tonight in a bid to boost flagging growth.

Spending on new-home building dropped at an annual rate of 23.9% in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5% in the third quarter. Over the course of the full year, residential spending fell 16.9%, the worst annual performance since the deep decline of 1982, when double-digit interest rates were used to bring down inflation.

Today's data suggested the US may be suffering from a mild dose of stagflation - weakening activity plus higher inflation. A gauge of prices favoured by the Fed - personal consumption spending excluding food and energy items - gained at a 2.7% annual rate in the fourth quarter. That was well ahead of the third quarter's 2% increase and Wall Street expectations. It was the biggest increase for any three months in one-and-a-half years.

Alan Greenspan, the former chairman of the Fed, said today that the chances of a US recession were greater than 50-50.